German fund flows: Specialist drivers and regulatory challenges
Driven by record low interest rates, the size of the German fund industry has doubled over the last ten years. Thomas Richter, CEO of the German Investment Funds Association BVI discusses the drivers.
Over the past year, the German fund industry has attracted record inflows, with combined assets reaching €2.382trn. Although the growth pattern is in line with an international trend – The European Fund and Asset Management Association has, for example, pointed to global investment fund assets reaching over €28trn recently – there are specific local drivers which are important in order to comprehend the dynamics of the German fund flows.
“The driving forces behind the recent record growth are twofold, lying both in demand for Spezialfonds on the institutional side as well as the growth of mutual funds,” says BVI CEO Thomas Richter.
Spezialfonds are a structure unique to the German market and are specifically aimed at institutional investors. Portfolios are split into different segments which can be managed by different portfolio managers depending on their asset class or key expertise. “Spezialfonds have been extremely successful over the past five years while investors are making increasing use of targeted investment opportunities,” Richter argues.
“There has been a growing process of specialisation, with asset managers increasing the range of services. Consequently, the division of labour in the asset management industry has advanced significantly.”
Since 2004, assets in Spezialfonds have increased from €540bn to €1.231trn, suggesting that institutional investor demand continues to be a key driver of fund flows.
MUTUAL FUND GROWTH
On the other hand, within the mutual fund segment, low interest rates are pushing retail investors to shift their money into funds, which are seen as a better option for obtaining returns.
Multi-asset funds in particular have become increasingly popular because they have less exposure to equity risk. “Private investors in Germany are still shaped by the experience of the tech bubble. It was the first time many private investors came in contact with securities including investment fund units, and they have lost a lot of trust as a result of the subsequent crash.”
“However, it is important to note that there is now a turning point as a result of low interest rates. There is a growing sense of awareness that reliance on interest rates effectively means a loss of money,” Richter says.
Consequently, while assets in mutual funds have been growing, from €489bn to €788bn over the past ten years, the pace of growth lags behind that of Spezialfonds.
When analysed by asset class, despite recent DAX records, equity funds have actually seen €10.2bn in net outflows in Europe over the past year, while multi-asset funds have grown in popularity, recording €8.2bn in net inflows across Europe, according to BVI data.
Richter highlights that in the case of Germany, legislation is one important factor behind the German reluctance to invest in stocks. For example, while yields on bond investments may be tax deductible, dividends returns from equity investments are subject to additional tax, which has a detrimental impact on returns.
A BAN ON INDUCEMENTS?
As an industry organisation, the shape of recent regulation affecting the asset management industry has been a key concern for the BVI. The organisation has a presence in Brussels and aims to influence the nature of key reforms such as Mifid II. Richter criticises the inconsistency of regulation, with the reporting frequency on potential fund risk varying broadly depending on the regulatory measure.
For example, whereas the Derivatenverordnung initiated by German regulator BaFin demands annual one page reports, AIFM guidelines require quarterly to biannual reports of 23 pages. One particular concern has been the possibility of a ban on inducements, which has already been implemented in several European countries, including the Netherlands, and is currently being discussed in in Denmark and Sweden.
According to Richter, there could be a negative impact on demand for independent advisors among retail clients. “We are in favour of competition between fee based advice and inducements. A ban on inducement would lead to an advice gap for many retail clients. In addition it would have an uneven effect depending on the nature of the investment product and form of distribution. In particular, a ban would hit investment fund units, stocks and bonds, not so life insurance products or building loan contracts,” Richter argues.
Pointing to the UK experience, he highlights that following implementation of the Retail DistributionReview (RDR), the number of independent advisors has declined by 15-20%.
Last year’s proposal by Esma, the European Securities and Markets Authority, to ban any inducements for goods or services relating to fund distribution has therefore faced strong opposition from the BVI. Following further negotiations in December 2014, Esma proposed a compromise which, for example, permits payment of inducements for services that allow advice and access to third party investment products. With the Esma proposals nowbeing handed to the European Commission, Richter is optimistic about the results, which are due to be implemented in 2016.
“We are very pleased that there has been a change of mentality with the appointment of the new commission, from Michel Barnier’s meticulous overregulation towards a renewed emphasis on consolidating existing regulation.”
“We are broadly supportive of Jonathan Hill’s proposals, specifically with regard to a capital markets union,” Richter adds. “However, if we want the capital markets union to succeed, overcoming regulatory obstacles remains key.”